Taxation

A tax is a compulsory financial charge imposed on a taxpayer by a governmental organization to fund government spending and various public expenditures. A failure to pay, along with evasion of or resistance to taxation, is punishable by law.

The British tax system

HMRC is responsible for administering and collecting taxes in the UK. Tax receipts for the UK totalled approximately £633.4 billion in 2019/20, an increase of 2.1% over the previous tax year.

Basic UK taxes include income taxes, property taxes, capital gains, UK inheritance taxes, and VAT. Many of these are progressive taxes, meaning that those with higher incomes pay a higher rate.

The British fiscal system applies throughout the UK and many of the smaller islands around the British coast. Furthermore, it includes oil drilling platforms in British territorial waters.

One interesting aspect of UK tax is that it treats spouses as separate entities and taxes them as individuals, except for a small allowance for the purpose of income taxes.

Before you can pay taxes in the UK, you need a national insurance number. Furthermore, you may also need to apply for a Skilled Worker visa (formerly Tier 2 visa). Now that the UK has left the EU, this also applies to citizens of the European Economic Area (EEA). However, EEA citizens who were residents of the UK before 1 January 2021 may be able to apply to the free EU Settlement Scheme.

Federal taxes in the UK

Taxes in the UK may involve payments to at least three different levels of government: the central government (HMRC), devolved governments (notably, Scotland), and local governments in the form of council taxes.

HMRC administers the following central taxes:

• Income tax
• Corporation tax
• Capital gains tax
• Inheritance tax
• Insurance premium tax
• Stamp, land, and petroleum revenue taxes
• Environmental taxes
• Climate change and aggregates levy and landfill tax
• Value-Added Tax (VAT)
• Customs duty;
• Excise duties

Local taxes in the UK

Local governments are responsible for administering council tax in the UK. Besides, they levy a limited number of fees and charges, such as street parking fees.

Taxes on goods and services in the UK

Value-Added taxes (VAT) in the UK apply to almost all goods and services. These may also apply to goods that you bring to the UK from abroad if you exceed the limits. Beginning in January 2021, if you import or order items online from outside the UK and the total does not exceed £135, you pay VAT at the point of sale.

The standard commercial tax rate in the UK is 20%, although certain goods and services are subject to lower UK commercial tax rates. VAT exemptions are also available on certain items, for example, long-term medical supplies.

The current UK commercial tax rates are:

What the rate applies to

Most goods and services

Some goods and services (e.g., baby car seat)

Zero-rated goods and services (e.g., food and children’s clothes)

Can you get a refund on VAT?

Tourists and visitors to the UK can shop tax-free during the course of their stay. They are entitled to claim a refund on any VAT paid for goods bought within the country – provided they take these items with them when they leave the UK.

In most cases, the shop or refund company charges you a fee for using tax-free shopping. Such refunds must be claimed by the last day of the third month after the month in which you bought them. These are only available to tourists, visitors, and UK nationals living abroad for at least 12 months.

If you belong to one of these categories, you must be able to prove this to the shop assistant and to customs when you leave the UK by showing your passport, visa, or other documents.

Items ineligible for VAT refunds

Presently, tax-free shopping or VAT refunds do not apply to the following:

• Services of any kind (for example, hotel bills)
• Goods that you’ve used, or partly used, in the UK (such as perfume or chocolates)
• Motor vehicles and boats
• Goods over £600 in value that will be exported for business purposes (you have to use a form C88 for these)
• Goods that will be exported as freight and goods that need an export license (except antiques)
• Unmounted gemstones and bullion
• Mail-order goods including internet sales

Not all retailers offer tax-free shopping. If you want to claim a VAT refund, you’ll first need to find a shop that does and ask the store for a VAT check or refund, which you’ll need to sign in the presence of the shop assistant. Present this form, together with your purchase receipts, ticket, passport, and boarding card at specified UK customs offices upon your departure; most ports and airports have one.

Once the form has been validated, you can either drop it in a customs post box or take it to a VAT refund office or agency to get your money, either in cash or via a refund to your credit card.

Who has to pay tax in the UK?

Overall many of the various taxes for which a UK resident is liable – with the exception of VAT – are in some way keyed to income taxes. The basic formula for this is to add up your personal income and benefits, subtract your personal allowance, and then pay the appropriate rate on the difference.

For the 2020/21 tax year, all individuals are permitted a personal allowance of £12,500, making income below this level tax-exempt. UK income tax rates are in steps depending on your income. These steps, or bands, also determine other tax rates, such as capital gains.

UK tax rates are the same for everyone regardless of their residency status. However, residency status does dictate what sources of income must be included in your return. An individual who is a UK resident for tax purposes is taxed on their worldwide income, with allowances to prevent double taxation from certain countries. Non-UK residents, on the other hand, only pay on income earned within the UK.

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